Unexpectedly resilient consumers kept spending

Much has been written about heroes in the past year, but the unsung hero has been the American consumer, who almost single-handedly prevented the country from plunging into a deep and prolonged recession.

Immediately after the Sept. 11 terrorist attacks, many economists feared a crippling of the weakened U.S. economy. But if the American spirit was shaken, it didn't keep people from spending.

A year later, experts compare the attacks to a hurricane - they were swift and violent. The damage to the economy, though, wasn't as devastating as expected. The consumer and the economy proved themselves more resilient than many had thought.

"The consumer has essentially been the whole story. The consumer has kept the economy aloft," said Thomas F. Carpenter, chief economist at ASB Capital Management Inc. in Washington.

"It was cataclysmic for a very short time," added Steve Cochrane, senior economist at Economy.com Inc., an economic forecasting and consulting firm based in West Chester, Pa. "The immediate impacts are pretty much over."

Just weeks after the attacks, the gross domestic product - a key measure of the health of the economy - grew at a solid 2.7 percent annual rate in the fourth quarter of last year and then surged to a 5 percent rate in the first quarter of this year.

"We had a robust growth rate," Carpenter said. "That was generated by a huge increase in consumer spending, which continued into the first quarter and the second quarter."

Some sectors suffered, to be sure. The airline, travel and tourism industries are still fighting to recover. The airline industry, which was struggling before the Sept. 11 attacks, lost hundreds of thousands of passengers and a staggering $7 billion last year.

The fallout further weakened financially strapped US Airways Group Inc., which filed for bankruptcy protection last month. United Airlines Inc., the nation's second-largest carrier, has announced that it also may be forced to seek Chapter 11 protection.

Theme parks such as Disneyland and Universal Studios saw attendance drop at least 10 percent last year. Many parks continue to struggle for customers and are offering steep discounts.

Hotels fared little better, with occupancy rates diving 15.9 percent last September from a year earlier, according to Smith Travel Research, an independent lodging research firm. Although rates have rebounded, they remained down almost 2 percent in the first six months of this year.

The attacks were "devastating" for these industries, said James W. Paulsen, chief investment officer at Wells Capital Management in Minneapolis. "There was a time that [business] virtually came to a standstill for both the airline industry and the entertainment or travel industry. It was purely related to the fear of terrorism and not wanting to be anywhere else but your home."

Layoffs rose as some companies halted production for several days and the demand for products and services fell, said Diane Swonk, chief economist of Bank One Corp. in Chicago.

Orders to factories for durable goods, such as refrigerators, airplanes and machinery, fell to the lowest levels since August 1996.

"The hunkering down, the cutting costs, the cutting back was just unbelievable," she said. "Many manufacturing plants actually shut down, and corporate America shut down."

Some sectors flourished, with people taking advantage of low interest rates and federal tax cuts. The Federal Reserve Board cut interest rates four times from Sept. 17 to Dec. 11 - slashing them from 3.5 percent to 1.75 percent, the lowest level in 40 years.

Auto sales were brisk, home sales soared, and businesses that dealt with personal and corporate security were caught without enough personnel.

Consumer spending slowed about 2 percent in September but surged the next month and remains strong today.

"The psychological effect on household spending and business confidence never seemed to materialize," said Michael R. Englund, chief market economist at Standard & Poor's in New York.

Instead of taking vacations, people snapped up big-screen television sets and DVDs and took advantage of low interest rates, Englund said.

General Motors Corp. reported a 31 percent jump in auto sales in October from a year earlier; Ford Motor Co.'s were up 36 percent; and Honda Motor Co. Ltd., saw sales rise 19 percent.

Homes sold almost as fast as they were listed. Homeowners rushed to refinance their homes, lured by record-low interest rates.

Another industry that boomed after the attacks was business and personal security.

Corporations wanted more guards patrolling their buildings, and some hired plainclothes specialists to protect executives.

Despite the trauma of the attacks, many experts say the economy is growing and will strengthen toward the end of the year. Some economists believe Sept. 11 nudged the country into recession, though many others say the economy had been heading for a fall.

But most economists agree that the impact of the attacks has been relatively small.

Still, some worry that the economy could feel the effects of the attacks for years to come. Corporate insurance costs have risen, and transporting products over international borders is more difficult, said Charles W. McMillion, chief economist at MBG Information Services in Washington.

Yet the economy survived, said Swonk, the Bank One economist. "It was resilient. For the economy, it was much less cataclysmic than it was for individuals."

In a 21-month period - from January 2000 to last September - the economy overcame Y2K fears that computers around the world would malfunction, the dot-com implosion, the stock market meltdown and the Sept. 11 attacks, she said. Besides that, it has survived the Enron debacle and other large bankruptcies and corporate accounting scandals.

"It gets to our adaptability," Swonk said. "We have the most flexible, adaptable economy in the world. We did what Darwin said we do best: We adapted."

Bill Atkinson is a writer for the Baltimore Sun, a Tribune Publishing newspaper.